Many people don’t understand the “progressive” nature of the U.S. income tax rates.
If someone says, I’m in the 25% tax bracket, that means that some – but not all – of their income is taxed at 24%.
Here’s how it works for U.S. federal taxes. (Some states have similar tax structures.)
Imagine a bucket that you pour your income into. When that bucket is full, the income starts cascading into a second bucket and, when that bucket is full, the remaining income cascades into another bucket and this continues successively – through eight buckets or until you run out of income.
Here’s the thing. The income in each bucket is taxed at a different rate, each rate being progressively higher than the previous bucket’s rate. The first bucket is not taxed at all; it contains the income equivalent to personal exemptions and deductions. Each additional bucket is taxed at a progressively higher rate.
The size of each bucket – or how much income fits into each bucket – depends upon the taxpayer’s filing status.
Here are the tax brackets – or buckets – for individuals as of this writing: